We see all types of deals out there. Small parks. Large parks. RV parks. But the deals that make money all seem to share the same DNA. Here’s a short course in the basics of making money with mobile home parks – just in time for the New Year.
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To make money, buy only parks that won’t lose money
I know it sounds elementary, but the first rule of making money is to make sure you buy a park that will not lose money. What this means is that the park in question already has a positive cash flow sufficient to cover the note payment and provide a return on capital. What does this eliminate? You got it – parks that sell at a price higher than a 10% cap rate, and parks that are vacant. If you buy a park at a 4% cap rate, then how are you going to make any money? Never buy into the concept of land appreciation. While that might sell well in California and Florida, that’s not the mobile home park business – that’s land speculation. We are in the income property business, and the only way values rise is when income rises. If you are starting out at a 4% cap rate, then it will take you a lifetime just to get the park in a position where it is worth what you paid for it. Don’t be a sucker.
Focus on parks that have upside that you can control
A good mobile home park will have upside in raising rents and cutting costs. These are variables that you can control. RVs and mobile homes moving in are things you can’t. Raising your rents is one of the best ways to make money – every dollar you bring in goes straight to the bottom line with no time, effort or risk on your part. Sub-metering water and billing it back to the customer is another great strategy. It costs money up front, but is a fast pay back. Cutting costs, such as replacing the manager with a less expensive alternative or appealing property taxes, are another great way to increase the net income, without a lot of effort and capital investment.
Buying a park at a 10% cap rate is great – but you need some additional upside, even if it’s only raising the rent annually.
Do terrific due diligence
If you do lousy due diligence – or none at all – you will probably never make any money with a mobile home park, unless it is through sheer luck. Due diligence is what allows you to confirm that the park is a good buy, and to detect a clunker and ditch it early on. When you do great due diligence, the odds that you will make money are huge, and that you will fail slight. When we talk to people who have done well with their park, they all share a propensity to do great diligence. When people call us who have parks that don’t work and won’t sell, you find that they have done no basic research at all prior to buying the park.
And be a decent operator
You don’t have to be a great manager to have a successful park. But you can’t be terrible. You have to know how to collect rent and stay on top of rules violations, and hold expenses down. You would be shocked at some of the income and expense statements we see on parks we do due diligence on. And the property condition is even worse. Even if you buy the greatest deal in the world, it’s not going anywhere if you don’t know how to run it.
Conclusion
The mobile home park industry is being fueled by the decline of the U.S. economy – and this is a huge market shift, not just a fad. There is plenty of money to be made in mobile home parks. But you have to go about it the right way.
